Auto-renewal contracts are a staple in the subscription-based software industry, but how do you ensure you’re creating legally binding contracts auto-renew contracts that work for everyone?
In 2024, auto-renewal contracts are no longer reserved for tech and digital companies, rather they’re becoming mainstream. Whether you’re somebody creating this type of contract or signing it, it’s important to understand the basics. Let’s dive in.
What are auto-renew contracts?
An auto-renew contract or automatic-renewal contract is an agreement that renews without manual input. The specific terms of the renewal and renewal period will be outlined by a specific term in that contract.
As the name suggests, auto-renew contracts will automatically renew unless one of the parties issues a notice of their decision not to extend the contract. This type of contract is common in the SaaS industry but can be found across a wide range of industries.
The most common clause that makes this contract an ‘automatic-renewal contract’ is often referred to as an ‘evergreen’ clause, as it automatically extends the contract without the need for amendments. If no party takes action against renewal, these contracts will automatically renew for the renewal period set in the contract.
As a customer, it’s your job to keep on top of your auto-renew contracts and give appropriate notice if you want them to end. If you don't do this, the contract will automatically renew and continue into the next renewal period.
Alternative versions of contract renewal
An evergreen clause is not the only way businesses can create an auto-renew contract. Some other methods that extend the contract term include:
- Right to renewal clause. This clause allows a customer to request an extension of their contract to complete ongoing negotiations. This is usually a short amount of time, under two weeks, and provides flexibility for both parties as they determine if the contractual relationship should continue.
- Required notice. In this case, renewal will only occur if the parties take action to renew the contract. So, it does require a notice of renewal for the contract but avoids renegotiation of contract terms. It's also an easy way to save legal costs and time, as the original contract language and terms are kept.
- Renewal proposal. If included in a contract, this section specifies that a renewal proposal has to occur by a specified date for the terms of the original agreement to continue. This is the most flexible option, as it allows parties to negotiate terms if they want to while retaining a majority of the original contract.
Are auto-renew contracts legal?
Yes, auto-renewal contracts are legal when they are handled correctly. Their enforceability depends on certain requirements and the particulars of that jurisdiction, as well as on the contractual relationship between the parties.
The main factor that determines this is whether the contract is between two business entities or a consumer relationship.
In a business-to-business contract
In a business-to-business (B2B) context, auto-renew contracts are common, especially in commercial contracts. When two businesses sign an agreement it is mutual. Both sides will have had the opportunity for legal review and to negotiate any terms they don’t agree on.
A court will enforce an autorenewal dispute if one business doesn’t cancel the autorenewal within the specified period. If the language in the contract is clear and the other business fails to follow this, the agreement can be enforced.
This will automatically extend the terms of the agreement alongside the rest of the contractual obligations.
In a business-to-consumer contract
In contrast to B2B contracts, business-to-consumer contracts need to be looked at in more detail when it comes to autorenewal. This is because they are fairly one-sided in nature, as consumers don’t have immediate access to the same legal resources as businesses.
For example, if you sign up for an premium subscription account, you as a consumer can't negotiate special terms for yourself versus a business worth thousands of dollars could.
This means that autorenewal provisions in B2C contracts (like most of the terms) are more likely to be weighted in favour of the vendor rather than the individual consumer, because they have all the power in this commercial relationship
In the US, efforts are being made to ensure consumers are protected from unfair contract renewal, as this article explores.
How do you create a legally sound auto-renew contract?
To create an auto-renew contract, the specific terms of that exact renewal and period need to be outlined in a contract renewal term within the original contract.
This represents a particular challenge to those tasked with managing the renewal of contractual relationships in a business - typically legal and procurement teams, or a contract specialist, although others may be affected too.
To help ensure that your business is creating sound, enforceable auto-renewal contracts, you should consider the following:
- Clear and concise wording. Disclose the auto-renewal in clear and concise language, that is readable to anybody not in legalese. The text should be easy to read and clearly labeled.
- Notify consumers. As the vendor, you must disclose auto-renewal before the customer signs (or clicks 'I agree’).
- Affirmative action. Ensure that the consumer is actively agreeing to an auto-renewal as opposed to passively - this means avoiding pre-ticked boxes online.
- Simplify the cancellation process. Consumers should be easily able to opt out of an autorenewal contract as courts don’t look favorably upon companies that overcomplicate this process.
- Communicate material terms. Make sure any additional costs that are incurred when an auto-renewal is completed are visible in the contract.
Finally, make sure you’re aware of the provisions and laws around auto-renewal in your jurisdiction. In the US, this varies state by state and some may look upon auto-renewal with friendlier eyes than others.
Advantages of auto-renew contracts
Setting up contracts to auto-renew has advantages for both parties. These advantages include:
- Less friction. Once the renewal date arrives there’s no paperwork to do, so services should be contracted faster than if there were to be manual renewal.
- Limits negotiation. If both parties are happy with the current terms then letting the contract auto-renew avoids an unnecessary negotiation period and limits redlines - which means more speed and fewer meetings
- Continuous service. Automatic renewal means the services can remain available throughout
- Simpler revenue capture. Autorenewal of the contract means vendors can guarantee another year of revenue without having to incur sales and legal costs
- Easier forecasting. Once the notice period has passed for termination, vendors can forecast revenue for the year ahead without needing to worry about the contract terminating
Disadvantages of auto-renew contracts
Despite all the advantages, the automatic contract renewal process also has several downsides that could lead either party into hot water.
- Missed deadlines. This is perhaps the clearest pain point. Put simply if you miss a renewal deadline or the notice period before it, you’ll be trapped in an expensive contract for another year (or longer)
- Rigid terms. Although both parties might have wanted to continue the relationship it could be on different terms to those originally agreed. However, now the contract has been renewed, it's far harder to negotiate new terms or change them
- Contract volumes. Businesses can easily find themselves managing dozens or even hundreds of contractual relationships, depending on the stage and size of the company. This makes it hard to keep track of upcoming contract renewals, which could result in missing auto-renewals if not managed correctly
When handled incorrectly, the difficulties listed above can put pressure on the relationship between each party, not to mention additional unwanted costs and obligations.
Managing auto-renew contracts with Juro
Fortunately, modern contract automation platforms like Juro have developed features that enable you to manage the auto-renewal contract process and avoid any unwanted consequences.
By managing your contract renewals more effectively, you'll be able to track key renewal dates and escape unwanted automatic contract renewals.
If you'd like to make managing your contract renewals a breeze, fill in the form below to get in touch today.